The politics of land use conversion in china case study of a guangdong county 3

Chapter Three
Land Use Conversion from 1988 onwards
3
Land Use Conversion from 1988 onwards:
Paying for Land Use Rights
The commodification of land in China preceded constitutional changes. From
September to December 1987, the Shenzhen government thrice conveyed land use
rights through negotiation, tender, and finally through an open auction which fetched
5.25 million yuan for 8,588 square metres of land for housing. Although the
conveyance of land use rights in Shenzhen contravenes the 1982 Constitution of the
PRC, which forbids the buying, selling and leasing of land, the auction took place in
the presence of a member of the Politburo of the Central Party Committee and
chairman of the State Economic System Reform Committee.
1
Shortly after, Article 10
of the Constitution was amended in April 1988 to legalize the transfer of land use
rights. The collection of land use tax in cities and town (chengzhen tudi shiyongshui),
superseding the collection of the land use fee, was also implemented in the same
year.
2

While these changes should have sparked off a surge in the conversion of
agricultural land, they did not, presumably due to the austerity measures adopted in
late 1988 and the tense political situation in China after the 1989 Tiananmen protests
and massacre. In Guangdong, the taking of cultivated land fell by more than 3,000
hectares from 1988 to 1989, dipping to a low of 2,540 hectares in 1990. Thereafter,
the depletion of cultivated land climbed to slightly more than 4,000 hectares in 1991,
following which there was a drastic surge to nearly 13,000 hectares in 1992, the year
Deng Xiaoping made his second round of southern tour.
3
Reforms to China’s land

1
He Guanghuai and Jiang Shunzhang, “Shenzhen shouci paimai tudi shiyongquan” (“Shenzhen
auctions land use rights for the first time”), Liaowang (Observation), No. 50 (1987), pp. 4-5.
2
Refer to the 1986 Land Administration Law, Article 2; “Zhonghua renmin gongheguo xianfa
xiuzhengan”; Guofa document no. 17 (1988), “Zhonghua renmin gongheguo chengzhen tudi
shiyongshui zanxing tiaoli” (“The PRC’s provisional regulations on land use tax in cities and towns”).
3
Refer to Figure 1.4 in Chapter One.
Yew Chiew Ping
42
Chapter Three
Land Use Conversion from 1988 onwards
use regime resumed in 1990, during which two pieces of legislation were enacted to
allow the transfer of land use rights among users and the development and operation
of state-owned land by foreign investors.
4
Prior reservations on land speculation
seem to have been cast aside. Three year later, in 1993, the State Council passed
provisional rules on the levy of land appreciation tax on the profits from the transfer of
land use rights and buildings and other attachments on land.
5

This chapter and the next examine the institutions that shape the incentives and
constraints for land use conversion by local cadres from 1988 to the present. This is
situated in the political and social milieu of the period as China quickened its pace of
market reform in the 1990s and sustained high GDP growth for over a decade.
6
It is
also a period during which bureaucratic corruption became endemic and the wealth

gap between and within localities widened.
7
Incentives to profit from land are greatly
boosted by the commercialization of land and the dual track land management
system, a legacy of the free allocation of land from previous eras. The continued
revenue squeeze from fiscal recentralization since 1994 has also compelled local
government to seek alternative revenue sources increasingly derived from land and
land development activities.
4
Yeh and Wu, “The new land development process,” pp. 337; Guowuyuanling document no. 55 (1990),
“Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing
tiaoli” (“The PRC provisional regulations on the conveyance and transfer of the land use rights of state-
owned land in towns and townships”); Guowuyuanling document no. 56 (1990), “Waishang touzi kaifa
jingying chengpian tudi zanxing guanli banfa” (“Provisional measures to manage the development and
operation of tracts of land by foreign investors”).
5
Guowuyuanling document no. 138 (1993), “Zhonghua renmin gongheguo tudi zengzhishui zanxing
tiaoli” (“The PRC provisional regulations on land appreciation tax”).
6
Lieberthal, “Governing China,” pp. 129; Maurice Meisner, Mao’s China and After: A History of the
People’s Republic, (New York: The Free Press, 1999), pp. 518.
7
Meisner, Mao’s China, pp. 532-34.
Yew Chiew Ping
43
Chapter Three
Land Use Conversion from 1988 onwards
Land Leasing Revenue and the Local Treasury
According to Ministry of Finance, revenue from the conveyance of land use rights of
state-owned land (guoyou tudi shiyongquan churang shouru) refers to all land

proceeds the state obtains from the assignment of land use rights of state-owned
land through conveyance and other methods, which includes:
1. The total transacted sum (excluding taxes) from the conveyance of land use rights
of state-owned land through tender, auction, bidding and negotiation;
2. The land proceeds in arrears from the transfer of land use rights of allocated state-
owned land or from using originally allocated land for commercial construction in
accordance with the law;
3. The land proceeds in arrears from the disposal and mortgage of land use rights of
allocated state-owned land;
4. The land proceeds in arrears from the transfer of reformed housing (fanggaifang),
economical housing (jingji shiyong fang) in accordance with regulations;
5. The land proceeds in arrears from changing the usage and other land use
conditions after the sale of land use rights of state-owned land;
6. Other revenues related to the conveyance or change of land use rights of state-
owned land.
8
The conveyance of the right to use state-owned land – defined as the process by
which the State, as landowner, grants land use rights to the land user for a specific
period of time, for which the land user pays the state a land conveyance fee – takes
place on the primary market.
9
On top of the land conveyance fee, land users incur a
number of other payments, including the expropriation cost of the land, various
8
Caizong document no. 68 (2006), “Caizheng bu guanyu yinfa ‘guoyou tudi shiyongquan churang
shouzhi guanli banfa’ de tongzhi” (“A Ministry of Finance’s notice to promulgate ‘measures to manage
the revenues and expenditures of the conveyance of state-owned land’”), Chapter 1, Article 2. Other
sources of income to be incorporated under the management of land conveyance revenue are: land
rental revenue paid by the lessee to the land resources management department for leasing state-
owned land; land proceeds from the lease of houses on allocated land; land compensation, resettlement

subsidy, compensation for young crops and attachments and relocation compensation etc. (excluding
land expropriation management fee) paid by the land user after the acquisition of land use rights
through allocation.
9
Guowuyuanling document no. 55 (1990), “Zhonghua renmin gongheguo chengzhen guoyou tudi
shiyongquan churang he zhuanrang zanxing tiaoli” (“The PRC temporary regulations on the conveyance
and transfer of the land use rights of state-owned land in towns and townships”), Chapter 2, Article 8.
Yew Chiew Ping
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Chapter Three
Land Use Conversion from 1988 onwards
stipulated land fees and land taxes.
10
Commercial developers and users purchase
land use rights by means of public auction (paimai), tender (zhaobiao), bidding
(guapai) or negotiation (xieyi) with land administration departments at various levels,
acting on behalf of the State.
11
The primary land market is monopolized by the State
– land collectively-owned by peasants is forbidden from entering the market directly.
Land conveyance and state allocation (huabo) constitute the dual-track land system
in the primary land market. Non-commercial land users may acquire land use rights
through state allocation in accordance with the law, without paying for the rights
although urban land use tax and various compensation fees to original landowners
are still payable.
12
Land use rights acquired on the primary market may be circulated
multiple times on the secondary land market through transfers (zhuanrang) or leasing
(chuzu). The transfer of land use rights refers to the process by which the land user
re-transfers land use rights obtained on the primary market through sale, exchange

or bestowal.
13
However, the land use rights of land, which has not been invested in,
developed and used within the period and according to the terms as stipulated by the
agreement on the sale of land use rights, are not to be transferred.
14
The lease of
land use rights refers to process by which the land user, as the leaser, leases to the
lessee the land use rights together with buildings and other attachments on the land,
10
Lin and Ho, “The State, Land System,” pp. 420.
11
Bidding is supposed to be an open process in which details of the land to be conveyed are displayed
as a public notice in the land transaction centre for a specific period of time, during which highest
bidding price is constantly renewed and displayed on the notice until the period expires. For further
details on the procedures of auction, tender and bidding, refer to Guotu ziyuanbu ling document no. 11
(2002), “Zhaobiao paimai guapai churang guoyou tudi shiyong quan guiding” (“Regulations on the
conveyance of land use rights of state-owned land through tender, auction and bidding”); Guotuzifa
document no. 114 (2006), “Guanyu yinfa ‘zhaobiao paimai guapai churang guoyou tudi shiyongquan
guifan’ (shixing) he ‘xieyi churang guoyou tudi shiyongquan guifan’ (shixing) de tongzhi” (“Regarding the
notice to promulgate ‘Regulations on the conveyance of the land use rights of state-owned land through
tender, auction and bidding’ (tentative) and ‘Regulations on the conveyance of the land use rights of
state-owned land through negotiation’ (tentative) ”).
12
Guowuyuanling document no. 55 (1990), Chapter 7, Article 43; Caizong document no. 68 (2006),
Chapter 3, Article 22, No. 1; See Yang Peichuan, Huang Meng and Song Haiou, “Lun woguo huabo tudi
shiyongquan zhidu de biduan ji qi wanshan” (“The shortfalls and correction of China’s system of state
allocated land”), Chongqing daxue xuebao (Journal of Chongqing University), Vol. 10, No. 6 (2004), pp.
146.
13

Guowuyuanling document no. 55 (1990), Chapter 3, Article 19.
14
Ibid.
Yew Chiew Ping
45
Chapter Three
Land Use Conversion from 1988 onwards
for which the lessee pays a rent to the leaser.
15
Land use rights may also be
mortgaged or used as collaterals (diya) on the secondary market.
16
According to an analysis by the State Council’s development research centre,
proceeds from the leasing of land use rights comprises more than 60 percent of local
governments’ extrabudgetary revenue and is the major force driving growth in local
investment.
17
In 2004, revenue from land was estimated to be 589 billion yuan.
18
This,
together with the rest of the 470 billion yuan of extrabudgetary funds, amounted to
almost 90 percent of total local revenue in 2004.
19
At the bottom of the hierarchy, land leasing had also become the main income
source for county and township governments’ extrabudgetary revenue, leading to the
practice of “yidi shengcai, yidi xingzhen” – literally, using land to grow wealth and
invigorate towns.
20
Some Chinese scholars estimate that income from land leasing
might constitute up to 80 percent of a township governments’ extrabudgetary

revenue, and 20 to 60 percent of some county-level governments’ revenue.
21
In three
15
Ibid., Chapter 4, Article 28
16
Ibid., Chapter 5.
17
Chang Hongxiao, “Xinyilun tudi tiaokong chengsuan jihe” (How much success for the new round of
land control and management), Caijing (Finance), No. 168, 18 September 2006.
18
Dong Ya, “Yusuanwai shouru naru zhengfu shouru fenlei tixi xianshi yueshu fenxi” (The incorporation
of extrabudgetary revenues into the classification system of government revenues: an analysis of the
realistic constraints), Caijing luncong (Collected Essays on Finance and Economics), No. 21 (2007), pp.
21.
19
The total local revenue was 1189.3 billion yuan in 2004; see Zhongguo tongji nianjian 2006, pp. 286.
In 2004, extrabudgetary fund is refers to “financial fund of various types not covered by the regular
government budgetary management, which is collected, allocated or arranged by government agencies,
institutions and social organizations while performing duties delegated to them or on behalf of the
government in accordance with laws, rules and regulations.” Refer to Zhongguo tongji nianjian 2005, pp.
295.
20
Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi shouyi ji qi fenpei” (“The appreciation of land
value and its distribution”), Diaoyan shijie (World of Survey and Research), No.1 (1996), pp. 39.
21
Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi,” pp. 39; Wu Liping, “Difang zhengfu zai tudi
shichang shang de juese yu diwei” (“The role of local governments in the land markets”), Tongji yu
juece (Statistics and Policy Decision), April (2004), pp. 52; Zhang Fei, Chen Chuanming and Kong Wei,
“Difang zhengfu jingzheng, nongdi feinonghua yu jingji zengzhang” (“Competition among local

governments, the non-agriculturalization of land and economic growth”), Ziyuan chanye (Resources and
Industries), Vol. 7, No. 5 (2005), pp. 88. According to a survey of 13 provinces and 12 cities including
Shanghai, most of the land revenues accrue to prefecture, county, town and township governments.
The land conveyance fee alone comprised 30 to 70 percent of the prefecture and county governments’
financial revenue. Refer to Baohu gengdi wenti zhuanti diaoyanzu, “Woguo gengdi baohu mianlin de
yanjun xingshi he zhengcexing jianyi” (“The dire straits of China’s arable land preservation and policy
suggestions”), Zhongguo tudi kexue (China Land Science), Vol. 11, No. 1 (1997), pp. 4
Yew Chiew Ping
46
Chapter Three
Land Use Conversion from 1988 onwards
county-level units in Zhejiang, for instance, income from land leasing alone made up
58 to almost 70 percent of the local governments’ extrabudgetary revenue.
22

Table 3.1 Revenue from the Conveyance of Land Use Rights, 2006
Land Area (hectare) Conveyance Fee
(million yuan)
Net Profits*
(million yuan)
Guangdong Province 14460.3 61602.20 10687.70
Guangzhou 1302.5 15827.07 286.24
Shaoguan 232.9 749.96 306.99
Shenzhen 1581.0 12939 1940.85
Zhuhai 1091.7 3865.51 709.13
Shantou 127.7 536.82 77.94
Foshan 4159.1 13959.25 4250.54
Jiangmen 1237.6 673.87 348.19
Zhanjiang 114.8 425.65 59.91
Maoming 247.4 268.47 128.95

Zhaoqing 652.3 977.10 208.54
Huizhou 1317.5 2904.44 896.81
Meizhou 121.3 194.99 87.37
Shanwei 82.6 174.09 45.98
Heyuan 433.7 917.32 69.96
Yangjiang 125.6 145.07 57.37
Qingyuan 394.1 725.54 63.68
Dongguan 581.1 4381.80 928.19
Zhongshan 380.2 1262.99 33.87
Chaozhou 47.7 161.18 31.91
Jieyang 140.2 375.14 127.33
Yunfu 89.1 136.95 27.93
* After deducting land compensation, initial development costs, administrative costs of conveyance, and
the cost of developing agricultural land.
23
Source: Guangdong guotu ziyuan nianjian 2006, pp. 501.
Revenue-Sharing Below Provincial Level: Constricting Local Revenues
The growing importance of land income has to seen in the context of the revenue
squeeze on local coffers in the post-1994 context. Table 3.2 illustrates China’s tax-
sharing system today. On top of implementing the tax-sharing system to replace the
pre-1994 fiscal-contracting system, local governments’ discretionary power in
granting tax breaks was curtailed and tax collection was centralized.
24
A Chinese
analyst suggests,
22
Zhang Hong, “Tudi zhengyong guocheng zhong de difang zhengfu xingwei fenxi” (“An analysis of
local governments’ behaviour in land expropriation”), Zhonggong Zhejiang shengwei dangxiao xuebao
(CCP ‘s Zhejiang School of Party Committee Journal), No. 4 (2007), pp. 68.
23

Refer to “2007 nian zhengfu shouzhi fenlei,” (“Year 2007 classification of government revenue and
expenditure”), item no. 103013301, “tudi jingshouyi.”
24
Wang Shaoguang, “China’s 1994 Fiscal Reform: An Initial Assessment,” Asian Survey, Vol. 37, No. 9
(1997), pp. 803; Becky P. Y. Loo and Sin Yin Chow, “China's 1994 Tax-Sharing Reforms: One System,
Differential Impact,” Asian Survey, Vol. 46, No. 2 (2006), pp. 216.
Yew Chiew Ping
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Chapter Three
Land Use Conversion from 1988 onwards
The tax-sharing system drives local governments to seek revenue growth
mainly through extrabudgetary and off-budget funds – administrative fees are
the mainstay for the former while principal sources for the latter are
agriculture-related retained funds (tiliu) and fees (tongchou), and land sales
revenue related to land development.
25
The sections that follow summarize the major changes – expanding expenditure
responsibilities and the cancellation of agricultural taxes that constitute a revenue
squeeze on local finances at the county level and below.
Table 3.2 China’s Current Tax-Sharing System
Central Taxes Central-Local Shared Taxes Local Taxes
Business tax and urban
maintenance and construction
tax of railways, head offices of
banks, head offices of insurance
companies
Value-added tax levied by the
customs
Consumption tax levied by the
customs

Income tax of central enterprises
Income tax of local banks,
foreign-funded banks and non-
bank financial institutions
Tariff
Vehicle purchase tax
Vessel tonnage tax
Interest income tax
Value-added tax: central 75%,
local 25%
Stock trading stamp duty:
central 94%, local 6%
Local enterprise income tax:
central 60%, local 40%
Personal income tax: central
60%, local 40%
Resource tax: tax on offshore
petroleum resources to central,
others to local
Business tax (other than that of
railways, head offices of banks,
head offices of insurance
companies)
Urban land use tax
Fixed asset investment
adjustment tax
Urban maintenance and
construction tax
Property tax
Vehicle and vessel license tax

Stamp duty
Arable land use tax
Contract tax
Land appreciation tax
Sources: Tsang Shu-ki and Cheng Yuk-sing, “China’s Tax Reforms of 1994: Breakthrough or
Compromise?,” Asian Survey, Vol. 34, No. 9 (1994), pp. 779; Jean C. Oi, Rural China Takes Off
(Berkeley: University of California Press, 1999), pp. 217; Sui Xiao, “Goujian guifanhua he xiangdui duli
de defangshui tixi” (“Building a standardized and relatively independent local tax system”), Shuiwu
yanjiu (Tax Research), Vol. 201, No. 2 (2002), pp. 35; Guofa document no. 85 (1993), “Guowuyuan
guanyu shixing fenshuizhi caizheng guanli tizhi de jueding” (“Regarding the State Council’s decision to
implement the tax-sharing finance management system”); Guofa document no. 37 (2001), “Guanyu
yinfa suodeshui”; Guofa document no. 26 (2003), “Guanyu mingque zhongyang yu difang suodeshui”;
Wang Yongquan, Ji Zhendong and Li Bing, “Woguo zhengquan yinhuashui fenxi” (“An analysis of
China’s stock trading stamp duty”), Luhang jingyuan xuebao (Luhang Economic School Journal), No. 2
(2003), pp. 69-70.
25
See Zhou Feizhou, “Fenshuizhi shinian: zhidu ji qi yingxiang” (“Ten years of tax sharing: the system
and its impact”), Zhongguo shehui kexue (China Social Sciences), No. 6 (2006), pp. 112-13. He
observes that county and township governments in central and western China rely on agriculture tax,
retained funds and fees levied on villagers, whereas governments in the east on land-related revenues.
Yew Chiew Ping
48
Chapter Three
Land Use Conversion from 1988 onwards
1) Growing Expenditures and Diminishing Revenues
Besides allocating different revenues to the central and provincial governments, the
1994 tax-sharing system clearly designates expenditure responsibilities between the
top two levels of governments. Between any two tiers of governments at the
provincial level and below, however, leaders at the higher level have the upper hand
in the assignment of revenue and expenditure responsibilities. As a result, fiscal

power has shifted upwards while work responsibilities has cascaded downwards
(caiquan zaishang, shiquan zaixia), meaning that revenues converge in the hands of
upper level governments whereas expenditures are passed down to lower level
governments.
26
The 1994 tax-sharing system has already disadvantaged local governments with a
smaller share in the major tax revenues. Yet provincial governments often retain a
substantial part of the local share, leaving subordinate levels with a further reduced
portion.
27
As some scholars suggest,
Under the current system, revenues from the VAT, business tax, consumption
tax and income tax, which are closely tied to economic progress, mostly
accrue to the central, provinces, and prefectural-level cities. The portion
shared by the county and township levels is very small, and tax collection and
administration are assigned to higher level tax departments; local taxes
controlled by counties and townships are minor, unstable, and weakly linked
to economic growth. Both the elasticity and growth potential of the revenues
are low.
28
26
Shi Yuping, “Nongcun shuifei gaige hou jiceng zuzhi jianshe de jige wenti” (“After the village tax
reform: some problems for the building of grassroots organization”), Baoji wenli xueyuan xuebao
(Journal of Baoji University of Arts and Sciences), Vol. 24 No. 6 (2004), pp. 27; Jin Taijun and Shi
Congmei, “Xiangzhen caizheng zhidu bianqian de lujing yilai ji qi pojie” (“Changes in the fiscal system of
towns and townships: path dependence and solutions”), Xuexi yu tansuo (Study and Exploration), Vol.
4, No. 165, pp. 86.
27
For example, the central apportions 75 percent of the VAT, the province takes up another 15 percent,
leaving a balance of 10 percent to be shared between the county and the township. Furthermore, a

lower proportion of the local taxes is allocated to townships, such as 60 percent of the business tax
accrues to the province while the county and township share the remaining 40 percent. Refer to Liu
Shanghe and Jiang Shilong, “Fenshuizhi hou xiangzhen caizheng mianlin de tiaozhan yu duice”
(“Challenges for town and township finances and countermeasures after the tax-sharing system”), Jilin
caishui (Jilin Finance and Taxation), No. 8 (1994), pp. 29-30.
28
Jiang Haichen and Yan Yan, “Qianxi fenshuizhi xia xianxiang caizheng shouru de guanli” (“A
preliminary analysis of county and township revenue management under the tax-sharing system”),
Caihui yuekan (Finance and Accounting Monthly), No. 7 (2006), pp. 26.
Yew Chiew Ping
49
Chapter Three
Land Use Conversion from 1988 onwards
The upper level government, with its relative superiority in political power and
position, often indiscriminately transfers the resources of its subordinate level to its
own coffers.
29
“Lucrative” departments are assigned to higher level governments
while cumbersome ones are to townships.
30
Revenue drain at lower levels is
exacerbated by cascading workload and expenditures. This is most evident in the
case of compulsory education in villages. After the tax-sharing reform, only 2 percent
of the expenses for compulsory education come from central coffers. The remaining
expenditure for this item is broken down as follows: 11 percent from provinces and
prefecture, 9 percent from counties and a hefty 78 percent are borne by townships.
31
Situated at the lowest rung of the hierarchy, county and township governments,
especially the latter, have borne the brunt of this divergence in fiscal power and
workload, so much so that their finances have fallen into dire straits. Between the

county and the township, most revenues accrue to the former.
32
In other words, the
township coffer is but an empty shell and lacks relative autonomy since most of its
revenues are remitted to the county.
The late 1990s saw the decline of county-owned enterprises – the mainstay of county
revenues – changing the counties’ main tax sources to small-scale commercial and
industrial enterprises, the construction and tertiary industries. To allay its financial
difficulties, county governments vie with townships for revenue, making the
government at the bottom of the five tiers the biggest loser under the tax-sharing
29
Ba Zhipeng, “Woguo fenshuizhi gaige dui xiangzhen caizheng de yingxiang” (“The influence of
China’s tax-sharing system on town and township finance”), Dangshi Bocai (Party History Discovery),
No. 12 (2006), pp. 37; Yan Yongbo, “Woguo xiangzhen caizheng de kunnan yu wenti fenxi ji zhengce
jianyi” (“Problems and analysis of China’s town and township finance and policy suggestions”), Jinrong
jingji (Finance and Economy), No.14 (2006), pp. 154; Zhou Feizhou, “Fenshuizhi shinian,” pp. 102.
30
Hu Xiaoqin, “Shui wei xiangzhen jianfu” (“Who to cut down the liabilities of towns and townships”),
Xiangzhen luntan (Town and Township Forum), No. 10 (2005), pp. 7.
31
Han Jun, “Caizheng tizhi yu xianxiang caizheng” (The financial system and finances of counties and
townships), Shuishou yu shehui (Tax and Society), No. 9 (2003), pp. 2; for other township expenses,
see Yan Yongbo, “Woguo xiangzhen caizheng,” pp. 153.
32
Chen Huagui and Liu Kewen, “‘Fenshuizhi’ dui xiangzhen guoku de yingxiang chu tan” (“The ‘tax-
sharing system’ and its influence on town and township coffers: a preliminary analysis”), Jinrong jingji
(Finance and Economy), No. 7 (1995), pp. 45-46.
Yew Chiew Ping
50
Chapter Three

Land Use Conversion from 1988 onwards
arrangements. For instance, agricultural taxes formerly collected by townships were
subsumed into county coffers, leaving to townships only part of the four agricultural
taxes and petty revenues from industrial-commercial taxes.
33
In another township, all
takings from tongchou, business tax, VAT, and some agricultural taxes were remitted
to the county. The township was left with paltry revenues from minor agricultural
taxes such as contract tax , arable land use tax (gengdi zhanyong shui), and
miscellaneous income from fines and administrative fees.
34
On top of that, all towns
and townships had to bear the cost of staff remuneration.
35
The lack of revenue has
also affected the operations of village grassroots political organization. After the
abolishment of village fees and taxes, some villages cannot even pay for basic
expenditures such as the cadres’ allowances, salaries and operational expenses,
resulting in villagers’ reluctance in taking up cadre posts.
36

2) Cancellation of Agricultural Taxes
After the implementation of the tax-sharing scheme in 1994, most of the revenues of
governments at the county level and below derived from agriculture, such as the
agricultural taxes, the arable land use tax etc.
37

33
Ba Zhipeng, “Woguo fenshuizhi gaige,” pp. 37.
34

Among the four agricultural taxes (nongye sishui) classified as local taxes – the rest being the special
agricultural product tax, arable land use tax and contract tax– agriculture and livestock farming tax
generated the most revenue, close to 40 percent all agricultural taxes in 2003. Refer to “What are
agricultural taxes?,” Renmin ribao (People’s Daily), 21 March 2004; Caishui document no. 120 (2004),
“Caizhengbu guanyu quxiao chu yanye wai de nongye techanshui youguan wenti de tongzhi” (“A
Ministry of Finance’s notice on the relevant issues regarding the abolishment of the special agricultural
product tax with the exception of tobacco leaves”); “Woguo jiang zai mingnian quanbu mianzheng
nongyeshui” (“China to abolish agricultural taxes nationwide from next year”), Nongcun caiwu kuaiji
(Village Finance and Accounting), No. 4 (2005), pp. 6.
35
Cao Liqun, “Butong leixing xiangzhen caizheng shouzhi ji qi pingheng wenti de shizheng yanjiu” (“The
revenues and expenditures of different types of towns and townships and the problem of financial
balance: an empirical study”) in Nongyebu nongcun jingji yanjiu zhongxin, Zhongguo nongcun yanjiu
baogao 2004 nian (China Village Research Report 2004), (Beijing: Zhongguo caizheng jingji
chubanshe, 2005), pp. 555.
36
Shi Yuping, “Nongcun shuifei gaige,” pp. 27; Liu Guochun, Lin Zhonggeng, Xu Xiaohua, and Ma
Yaxue, “Nongcun shuifei gaige dui jiceng zhengquan jianshe yingxiang de diaocha yu sikao” (“The
impact of village tax reform on the building of grassroots political power: a survey and some thoughts “),
Zhonggong Sichuan shengwei dangxiao xuebao (Journal of Sichuan Party School), No. 1 (2005), pp.
98.
37
Zhan Mingfang, “Fenshuizhi tiaojian xia xianji caizheng de chulu” (“Seeking a way out for county
finances under the conditions of the tax-sharing system”), Hubei caishui (Hubei Finance and Taxation),
No. 12 (1994), pp. 13.
Yew Chiew Ping
51
Chapter Three
Land Use Conversion from 1988 onwards
The reclassification of local enterprise and personal income taxes as shared taxes

from 1 January 2002 spurred the growth of other local taxes, attesting to the
observation that a fall in a tax revenue source is compensated with a rise in another
to make up for the shortfall in earnings. Urban land use tax and urban maintenance
and construction tax registered a faster growth after 2001. Agricultural taxes, which
were on the decline from 1999 to 2001, spiked by 47 percent to 42 billion yuan in
2002 (see Figure 3.1). In the less-developed central and western China where
township-level revenue from industrial-commercial taxes were marginal, special
agricultural product tax, animal slaughter tax, tiliu tongchou and other ad hoc fees
grew rapidly to equalize the tax burden.
38
The resulting burden on villagers was the
main reason for the village taxes and fees reform of 2002.
39

From 2002 onwards, the animal slaughter tax (tuzhaishui), special agricultural
product tax (nongye techan shui) and agriculture and livestock farming tax
(nongmuye shui) were scrapped in a piecemeal reform of village taxes and fees
(nongcun shuifei gaige). On top of taxes, non-tax revenues such as the town and
township fees (xiangzhen tongchou), miscellaneous administrative fees and
government funds levied on villagers were also abolished.
40
From 2003, agricultural
taxes began to dip again (see Figure 3.1). Concomitantly, the same period saw an
annual growth of over 30 percent in the takings from arable land use tax. It may be
deduced that the drop in earnings from agricultural taxes was compensated by a rise
in arable land use tax.
38
Han Jun, “Caizheng tizhi,” pp. 2.
39
Zhou Feizhou, “Fenshuizhi shinian,” pp. 113.

40
Among the four agricultural taxes (nongye sishui) classified as local taxes – the rest being the special
agricultural product tax, arable land use tax (gengdi zhanyong shui), and contract tax (qishui) –
agriculture and livestock farming tax generated the most revenue, close to 40 percent all agricultural
taxes in 2003. Refer to “What are agricultural taxes?”; Caishui document no. 120 (2004); “Woguo jiang
zai mingnian quanbu mianzheng nongyeshui,” pp. 6.
Yew Chiew Ping
52
Chapter Three
Land Use Conversion from 1988 onwards
Figure 3.1 Some Local Taxes (100 million yuan)
Sources: Zhongguo caizheng nianjian 1998 (China Finance Yearbook 1998) (Zhongguo caizheng
zazhishe, 1998), pp. 469; Zhongguo caizheng nianjian 2005 (China Finance Yearbook 2005), Zhang
Shaochun et al. (eds.), (Zhongguo caizheng zazhishe, 2005), pp. 368.
Land Revenues
Left with a small piece of the carved-up revenue pie, local governments are
constantly seeking alternative sources to meet growing expenses. As mentioned
previously, these sources derive mostly from land through the leasing of land use
rights, and attendant development in the construction and real estate industries,
which will be explored in depth in Chapter Five.
Whereas other revenue sources such as the VAT and income taxes have been
recentralized with the 1994 reforms, revenue from the leasing of state-owned land
had bucked the trend. After the PRC Constitution was amended in 1988 to sanction
the transfer of land use rights, the State Council circulated a notice to strengthen the
management of income from such transfers. The income, which was to be used for
urban building and land development, was to be shared by the central and local
governments in the ratio of 40:60.
41
In 1992, the land income was further divided into
income from the conveyance (churang) of land use rights and that from the

41
Guofa document no. 38 (1989), “Guowuyuan guanyu jiaqiang guoyou tudi shiyongquan youchang
churang shouru guanli de tongzhi” (“The State Council’s notice on strengthening the management of the
revenue from the conveyance of land use rights of state-owned land”).
Yew Chiew Ping
53
0
100
200
300
400
500
600
700
800
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Urban Land Use Tax
Urban Maintenance & Construction Tax
Agricultural Taxes
Arable Land Use Tax
Chapter Three
Land Use Conversion from 1988 onwards
secondary transfer (zhuanrang) of land use rights, five percent of each was to be
remitted to the central government.
42
Despite the declining proportion that was to be
remitted to the Centre, local governments still tried ways and means to retain all land
proceeds, such as by under-declaring the sum of land revenue or charging rental for
attached structures on land.
43

After the implementation of the tax-sharing system in
1994, local governments no longer have to remit land proceeds to the Centre.
44
From 1 January 1999, however, the land use fee for newly acquired land for
construction (xinzeng jianshe yongdi tudi youchang shiyongfei) – was to be split
between the central and the local governments in the ratio of 30 percent and 70
percent respectively.
45
The fee is determined according to the location and grade of
land, ranging from the lowest rate of 10 yuan per square metre in places such as
Inner Mongolia counties to the highest rate of 140 yuan per square metre in parts of
Shanghai.
46
Current rates, adjusted from the pre-2007 rates, were raised by 100
percent in January 2007 (see Table 3.3). According to an estimate based on 2005
figures, after the adjustment, the total payment for the use of newly acquired land
would increase to nearly 43 billion yuan, which is still lower than the total profit of
76.3 billion yuan from newly acquired land nationwide.
47
42
Caizongzi document no. 172 (1992), “Caizhengbu guanyu banbu ‘guanyu guoyou tudi shiyongquan
youchang shiyong shouru zhengshou guanli de zanxing banfa’ he ‘guanyu guoyou tudi shiyongquan
youchang shiyong shouru ruogan caizheng wenti de zanxing guiding’ de tongzhi” (“The Ministry of
Finance on the promulgation of ‘provisional measures on managing the collection of revenue from the
conveyance of the land use rights of state-owned land’ and ‘provisional regulations on some financial
issues relating to the revenue from the conveyance of the land use rights of state-owned land’”).
43
Baohu gengdi wenti zhuanti diaoyanzu, “Woguo gengdi baohu,” pp. 6.
44
Chan Kam Wing, “Urbanization and Urban Infrastructure Services in the PRC” in Christine P. W.

Wong (ed.), Financing Local Government in the People’s Republic of China (Hong Kong: Oxford
University Press, 1997), pp. 109; Zhang Hong, “Tudi zhengyong guocheng,” pp. 68.
45
For a definition of the fee, refer to Caizong document no. 48 (2006), “Guanyu tiaozheng xinzeng
jianshe yongdi tudi youchang shiyongfei zhengce deng wenti de tongzhi” (“Regarding the notice to
modify the policy and other issues on the land use fee for newly acquired land for construction”).
46
Refer to Caizong document no. 48 (2006), appendix 2.
47
Sun Rongfei, “Caizhengbu, guotu ziyuan bu, yanghang lianhe fabu tongzhi: xinzeng jianshe yongdi
shiyongfei tigao yi bei” (“A Joint Notice from the Finance Ministry, MLR and the Central Bank: payment
for newly acquired land for construction to be doubled”), Diyi caijing ribao (Top Financial Daily), 21
November 2006.
Yew Chiew Ping
54
Chapter Three
Land Use Conversion from 1988 onwards
Table 3.3 Standard Rates of Payment for Newly Acquired Land for
Construction (yuan per square metre)
Grade 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Rate 140 120 100 80 64 56 48 42 34 28 24 20 16 14 10
Source: Caizong document no. 48 (2006).
The entire sum was to be used for the development of agricultural land.
48
A 2004
document clarified that the fee was to be paid to national coffers at all levels, after
which 30 percent would be remitted to the Centre, and 70 percent shared among
provinces, prefectures and counties accordingly to agreed rates.
49
Control over this

fee was tightened again from 1 January 2007, from which all 70 percent of the fee
accruing to local governments would be centralized and paid to the national coffers at
the provincial level.
50
These regulations, however, had not diminished the importance of land to local
treasury as reflected in the popular saying that “the first coffer banks on industry, the
second coffer banks on land” (diyi caizheng kao gongye, di’er caizheng kao tudi).
51
In
Shenzhen, for instance, revenue from land leasing comprised as high as 80 percent
of total local government revenues in the 1990s.
52
As of 2006, the municipal’s
revenue from land leasing was 12.9 billion yuan, the third highest in the whole of
Guangdong province after Guangzhou and Foshan (see Table 3.1).
48
Refer to the Land Administration Law, Article 55.
49
Caizong document no. 85 (2004), “Guanyu jinyibu jiaqiang xinzeng jianshe yongdi tudi youchang
shiyongfei zhengshou shiyong guanli de tongzhi” (“Regarding the notice to further strengthen the
collection, usage and management of land use fee for newly acquired land for construction”). The
division of the remaining 70 percent of land conveyance fee varies from place to place. According to
Hsing You-tien, provinces and prefecture-level cities get 20 percent each whereas counties keep the
remaining 30 percent. Townships’ share is determined by county-level governments, which can be as
low as 5 to 10 percent. See Hsing You-tien, “Brokering Power and Property,” pp. 108.
50
Land Administration Law, Chapter 5, Article 55; See also Caizong document no. 48 (2006); Caizong
document no. 68 (2006), Article 18, No. 3.
51
Zhou Feizhou, “Shengcai youdao: tudi kaifa he zhuanrang zhong de zhengfu he nongmin” (“Money-

spinners: government and peasants in land development and the transfer of land use rights”),
Shehuixue yanjiu (Sociological Study), No. 1 (2007), pp. 11.
52
Peterson, “Land Leasing and Land Sale,” pp. 6.
Yew Chiew Ping
55
Chapter Three
Land Use Conversion from 1988 onwards
The numerous fees accompanying land development further enhanced its
profitability.
53
Although the arbitrary levying and collection of fees is illegal, a
substantial part of the government’s takings from land was derived not from direct
taxes but from ad hoc fees under various pretexts (see Table 3.4).
54
In the Nanhai
district of Guangdong, for instance, to convert 6.7 square metres

of land to non-
agricultural use by a transfer of land use rights incurred the following costs: arable
land use tax of 4,000 yuan, land expropriation administrative fee of 1,500 to 1,800
yuan, cultivation and reclamation fund of 10,000 yuan, agriculture insurance of 6,000
yuan, and irrigation construction fee of 1,333 yuan; to convert the same land area by
a conveyance of land use rights incurred the preceding costs and an additional
amount for buying over the rights, which was in the range of 10,000 to 25,000 yuan
for conversion into industrial use, 12,500 yuan for commercial use, and 80,000 to
100,000 yuan for housing development.
55
It was estimated that the income generated
from land leasing can be as high as 18 times the cost of acquiring land.

56

Moreover, land leasing sets off a “domino effect” that increases governments’
takings. As a land bureau official in Beijing’s Daxing district suggests, Daxing district,
which had around 100 development zones before 2003, earned hundreds of million
yuan every year from land leasing. After leasing land and attracting investments, the
government earned revenue from providing water and electricity, on top of tax
revenues from industrial development and the subsequent taking off of the tertiary
industry.
57

53
See Zhang Hong, “Tudi zhengyong guocheng,” pp. 68, for the miscellaneous fees pertaining to land
transactions collected by various government departments.
54
Lin Shumin and Yang Xilian, “Woguo tudi shuishou tizhi gaige de sikao” (“Some thoughts on the
reform of China's land tax system”), Xiangzhen jingji (Town and Township Economy), No. 3 (2006), pp.
58.
55
Zhang Fei et al., “Difang zhengfu jingzheng,” pp. 88.
56
Wang Jun, “‘Tudi caizheng’ de dongli jiegou” (“The incentive structure of ‘land coffer’”), Liaowang
xinwen zhoukan (News Watch Weekly), No. 37 (2005), pp. 26.
57
Chen Xiao, “Kaifaqu shoudi: yi pan meiyou xia wan de qi” (“Enclosure of land for development zones:
an unfinished game of chess”), Xinwen zhoukan (News Weekly), No. 11 (2004), pp. 38-41.
Yew Chiew Ping
56
Chapter Three
Land Use Conversion from 1988 onwards

The real estate industry, in particular, is an attractive source of revenue. In many
cities in Beijing, Tianjin, Guangdong, Hunan, Shaanxi and other provinces, fees from
real estate development are subsumed under the miscellaneous land administrative
fees.
58
Moreover, local governments have the incentive in promoting real estate
development as most of the tax revenues related to real estate development are local
taxes.
59
Local governments raise large sums of revenue through land speculation.
60
Government officials and property developments often collude to manipulate land
and property prices through hoarding land or properties.
61
Rebuking the claim of land
shortage, the MLR clarifies that the land available for real estate development had in
fact grown by 4 percent in 2004 despite a moratorium on the approval for land use
conversion in the same year. In 2005 alone, developers were holding on to 400,000
mu of land that was overdue for development.
62
Land speculation by state agents
and developers has been widely cited as the cause of high property prices in China.
63
Table 3.4 and 3.5 list the multitudinous revenue sources from land development,
including a variety of taxes classified under the within-budget funds, miscellaneous
and ad hoc fees as well as land conveyance fee that constitute the extra-budgetary
funds.
58
Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi fenpei tixi, shixian tudi peizhi xiaolü yu
gongping” (“Restructuring the system of land proceeds distribution to achieve efficiency and fairness in

land allocation”), Guotu ziyuan tongxun (Land and Resources News), No. 4 (2002), pp. 64.
59
Chen Xiao, “2005 nian: fangjia gongjian nian” (Year 2005: tackling high housing prices”), Zhongguo
xinwen zhoukan (China News Weekly), No. 1-2 (2006), pp. 22.
60
Zhang Xiaojing and Sun Tao, “China’s Current Real Estate Cycle,” pp. 64.
61
Luo Tao, “Shui zhenzheng chengzhe gao fangjia?” Difang zhengfu!” (“Who is propping up high
property prices? Local governments!”), Xinhua meiri dianxun (Xinhua Daily News), 22 March 2005, pp.
1; “Ren Zhiqiang biaoshi: zhengfu chaodi shi fangjia maodun de zhuyao yuanyin,” Tianjin jingji diantai
(Tianjing Economic Station), 19 October 2005; Liu Shan, “Zhengfu kaifashang shi chaodi de hengha
erjiang” (“The government and property developers are partners in land speculation”), Zhonghua
gongshang shibao (Chinese Industrial and Commercial Times), 5 June 2006, pp. 003 ; Xu Shuangmin
and Mo Guangcai, “Fangdichan ‘re’ zhong de difang zhengfu ‘jingjiren’ xingwei” (“The economic
behaviour of local governments in the property fever”), Changjiang luntan (Changjiang Forum), No. 5
(2007), pp. 45.
62
Dong Wei, “Guotu ziyuanbu boche ‘dihuanglun’” (“The Ministry of Land and Resources rebuked ‘land
shortage allegations’”), Zhongguo jianshebao (China Construction News), 6 July 2007, pp. 007.
63
Luo Tao, “Shui zhenzheng chengzhe gao fangjia ?”
Yew Chiew Ping
57
Chapter Three
Land Use Conversion from 1988 onwards
Table 3.4 Local Governments’ Land Revenues
64
Within-Budget Funds Extrabudgetary Funds
A. Land-Related Taxes
Direct Taxes

65
Indirect Taxes
B. Administrative Fees
66
C. Land Conveyance Fee
Land
development:
arable land use
tax, fixed asset
investment
adjustment tax
Transfer of land
use rights
(zhuanrang): land
appreciation tax,
business tax,
urban
maintenance and
construction tax,
contract tax,
stamp duty,
enterprise income
tax, personal
income tax
Land Use: urban
land use tax
Business tax from
the construction
industry
Enterprise income

tax from the
construction
industry
Business tax from
the real estate
industry
Enterprise income
tax from the real
estate industry
Property tax
Land Management
department：
1〕 Stipulated fees: fee
for the development
of agricultural land,
management fee,
administrative fee
2〕 Special fees：
resettlement fee,
newspaper
announcement fee,
compensation for
the repossession of
state-owned land,
fee for offsetting the
land use quota
3〕 Land use fee for
newly acquired land
for construction
Finance department：Land

conveyance fee (see column
C for details), land use fee,
land rent.
Other departments：
miscellaneous fees levied by
the agriculture department,
housing property
department, water
conservancy department,
traffic department, post and
telecommunication
department, heritage
department, forestry
department etc.
Taxes: includes the taxes in
column A as well as
government funds such as
the agricultural development
fund and the social security
fund.
Compensation: land
compensation, resettlement
compensation,
compensation for young
crops and other attachments
Land development: fees for
channelling road, water,
electricity and
telecommunication etc.

Administrative fee: 2-5
percent of the land
conveyance fee for the Land
Management department.
Sources: Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi,” pp. 63-68; Jin Dongsheng,
“Woguo tudi shuishou,” pp. 7-9; Zhou Feizhou, “Shengcai youdao,” pp. 50-82.

64
All land revenues accrue to the local government, with the exception of 60 percent of the enterprise
income tax from the construction and real estate industries, which accrue to the central government.
65
Direct taxes related to land make up a relatively small part of local revenue, around 6 to 14 percent.
However, these taxes are still significant to local governments since they get to retain all of direct tax
proceeds. Most of the land taxes centre around the transfer of land use rights, i.e. land use conversion,
meaning that tax revenue increases as the government appropriates more agricultural land. See Jin
Dongsheng, “Woguo tudi shuishou zhidu gaige shexiang” (“Some thoughts on the reform of China’s
land
taxation system”), Zhongguo tudi (China Land), No. 11 (2006), pp. 7-9; Zhou Feizhou, “Shengcai
youdao,” pp. 7.
66
For more examples on the miscellaneous fees, refer to Guotu ziyuanbu tudi liyongsi diaoyanzu,
“Chonggou tudi shouyi,” pp. 64.
Yew Chiew Ping
58
Chapter Three
Land Use Conversion from 1988 onwards
Table 3.5 Land Taxes and Tax Rates
Tax Taxable Item Tax Rate
Arable land use tax Area of arable land occupied 5 yuan to 50 yuan per
square metre

Fixed asset investment
adjustment tax
Sum of investment 0% to 30%
Land appreciation tax Transfer of land use rights and attached
structures on land
30% to 60%
Business tax Turnover in the transfer of intangible asset 5%
Urban maintenance and
construction tax
Sum of business tax 1% to 7%
Stamp duty Transacted sum specified in the transfer of
title deed
0.5%
Contract tax Transacted sum in the transfer of land use
rights
3% to 5%
Urban land use tax Area of urban land used 0.6 yuan to 30 yuan per
square metre
Property tax Property value and rent 1.2% to 12%
Sources: Jin Dongsheng, “Woguo tudi shuishou zhidu,” pp. 7; Guofa document no. 90 (1986),
“Zhonghua renmin gongheguo fangchanshui zanxing tiaoli” (“PRC provisional rules on the property
tax”); Guowuyuanling document no. 511 (2007), “Zhonghua renmin gongheguo gengdi zhanyongshui
zanxing tiaoli” (PRC provisional rules on the arable land use tax”); Caishui document no. 9 (2007),
“Guanyu guanche luoshi Guowuyuan guanyu xiugai ‘Zhonghua renmin gongheguo chengzhen tudi
shiyongshui zanxing tiaoli’ de jueding de tongzhi” (“Notice to implement the State Council’s decision to
amend the ‘PRC provisional rules on the urban land use tax’”).
An analysis of the contribution of land revenues to the local treasury in Shaoxing
county in Zhejiang shows that income from land conveyance made up 66 percent of
the county’s extra-budgetary revenue in 2003. The contribution of direct and indirect
land-related taxes to the county’s within budget funds also grew from 30.5 percent in

2001 to 38.4 percent in 2003.
67
In addition to revenue from leasing land use rights, ad hoc fees and taxes from land
development activities, local cadres may also use their power to create rent in land
markets to exchange for bribes.
Rent-Seeking and Corruption in China’s Land Markets
Rent-seeking, suggests Buchanan, is just another word for profit-seeking. What
differs is the institutional context. Whereas profit-seeking refers to the maximizing of
returns in an “ordered market structure” with “socially beneficial consequences,” rent-
seeking describes behaviour under particular institutional settings where “individual
67
Zhou Feizhou, “Shengcai youdao,” pp.12-13.
Yew Chiew Ping
59
Chapter Three
Land Use Conversion from 1988 onwards
efforts to maximize value generate social waste rather than social surplus.”
68
Rent is
created when the government interferes with markets to manipulate prices. This
power of rent-creation may be used to seek bribes, which results in corruption
defined as “the sale by government officials of government property for personal
gain.”
69
The sections below analyze the transaction of state-owned land, desired by
land buyers such as property developers etc. to pursue economic activity, for
personal gain.
70
According to a survey on land policy reform by the State Council’s development
research centre, only 15 percent of land conveyance in eastern China were

conducted through more transparent channels of auction, tender or bidding while the
remaining 85 percent were transacted via state allocation or negotiation; in western
China, the percentage of land conveyance through auction, tender or bidding was
less than 10 percent.
71
A Chinese scholar also estimates that up till year 2000, only
five percent of the total number of land conveyance took place through auction,
tender and bidding.
72

Nationwide statistics are consistent with those of the Guangdong province, where out
of a total of 8,546 cases of land conveyance in 2006, 6,964 cases or 81.5 percent
68
James M. Buchanan, “Rent Seeking and Profit Seeking,” in Robert D. Tollison and Roger D.
Congleton (eds.), The Economic Analysis of Rent Seeking (Aldershot, Hants, England: Edward Elgar
Publishing, 1995), pp. 46-47. The motivation of profit seeking and rent seeking is the same across the
two institutional settings but the outcome differs. In other words, resources devoted to rent-seeking are
non-productive since they do not create value.
69
Andrei Shleifer and Robert W. Vishny, "Corruption," The Quarterly Journal of Economics, Vol. 108,
No. 3, pp. 599.
70
Incidentally, it is an open secret that the price of rent is incorporated into property prices in China. This
is to say that consumers bear the cost of rent-seeking while the State suffers a loss through land
disposed at low prices. See “Ba bumen yanda fangchan quanqian jiaoyi” (“Eight departments toughen
up on the exchange of favours in real estate”), Beijing chenbao (Beijing Morning News), 9 April 2007;
Deng Dacai, “Zhidu shilling: nongdi jiaoyi shikong zhi yuan” (System failure: the root of disorder in
agricultural land transactions”), Diaoyan shijie (World of Survey and Research), No. 2 (2004), pp. 36.
71
Gao Juhui and Wu Chunlai, “Fenshuizhi, tudi caizheng yu tudi xinzheng,” (“The tax-sharing system,

land financing and new land policy”), Zhongguo fazhan guancha (Observation on China’s
Development), No. 11 (2006), pp. 26.
72
Deng Dacai, “Zhidu shilling: nongdi jiaoyi shikong zhi yuan” (System failure: the root of disorder in
agricultural land transactions”), Diaoyan shijie (World of Survey and Research), No. 2 (2004), pp. 37;
See also Wong and Zhao, “The Influence of Bureaucratic Behavior,” pp. 120 on the infrequency of open
tender and auction of land.
Yew Chiew Ping
60
Chapter Three
Land Use Conversion from 1988 onwards
were conducted by negotiation, 18 by tender, 376 by auction, and 1,188 by bidding.
73
Furthermore, although the regulations promulgated by the MLR specifiy that land for
commercial, tourism, entertainment and commercial housing purposes must be
conveyed through auction, tender or bidding, local governments have been slack in
implementation and enforcement.
74

As shown in Table 3.6, land for commercial, industrial and housing purposes are
predominantly conveyed via negotiation. However, the price of land conveyance
through negotiation is lower than that generated through the supposedly more open
and transparent channels. In Guangdong in 2006, for instance, the average price of
land through negotiation was 1.4 million yuan per hectare, whereas the average
prices through tender, auction and bidding are 57.8 million yuan per hectare, 22.7
million yuan per hectare and 8.2 million yuan per hectare respectively.
75
Profit was
also lower for land conveyances through negotiation (see Table 3.7). A comparison
of three cities in eastern, central and western China also shows that land proceeds

from auction, tender and bidding were higher than those from negotiation.
76
If local
governments were revenue-driven, why, then, is land conveyance through
negotiation the most prevalent practice?
Table 3.6 Land Conveyances in Guangdong Province, 2006
Negotiation Tender Auction Bidding
Land Area (hectares) 10688.8 128.8 622.9 3019.8
Transaction Price (million
yuan)
15130.8 7442.3 14169 24860
Profits (million yuan) 813.9 (5.4%) 703 (9.4%) 3317 (23%) 5853 (23.5%)
Source: Guangdong guotu ziyuan nianjian 2007, pp. 501-502.
73
Guangdong guotu ziyuan nianjian 2007, pp. 501-502.
74
Guotu ziyuanbu ling document no. 11 (2002), Article 2. See also Guotu ziyuanbu ling document no. 21
(2003), “Xieyi churang guoyou tudi shiyongquan guiding” (“Regulations on the conveyance of the land
use rights of state-owned land through negotiation”), Article 9.
75
Guangdong guotu ziyuan nianjian 2007, pp. 501-502.
76
Wang Xiaoying et al., “Woguo nongdi zhuanyong.”
Yew Chiew Ping
61
Chapter Three
Land Use Conversion from 1988 onwards
Table 3.7 Supply of State-Owned Land in Guangdong by Land Use Type, 2003
(No. of Cases)
TOTAL Negotiation Tender Auction Bidding

Commercial and
Services
2722 1793 (65.9%) 59
(2.2%)
69
(2.5%)
801
(29.4%)
Industrial, Mining and
Warehouses
1928 1777
(92%)
33
(1.7%)
31
(1.6%)
87
(4.5%)
Housing 2358 1768
(75%)
41
(1.7%)
205
(8.7%)
344
(14.6%)
Source: Guangdong guotu ziyuan nianjian 2004 (Guangdong Land Resources Yearbook 2004), Lin
Haokun et al. (eds.), (Guangdongsheng ditu chubanshe, 2004), pp. 532-33.
One scholar’s observation provides some clues. Referring to the transfer of land use
rights in China through leasing, Ting Gong points out that the process is often subject

to price negotiations, despite the central government’s call to adopt more transparent
methods such as bidding. Since such closed-door negotiations cannot be effectively
regulated due to its convert nature, they are the hotbed for the exchange of favours
between public authorities and private interests.
77

The above observation is also relevant to land conveyances in China’s primary land
market, where opportunities for rent-seeking abound, all the more owing to
government monopoly. One prominent example of corruption revolving around land
in China is the case of Yin Guoyuan, vice bureau chief of Shanghai housing and land
resources bureau for a decade from 1994 to 2004. During his tenure, Yin used his
power in approving land conveyance deals to exchange for at least 30 housing
properties worth a few million yuan each. Even after his retirement, he was able to
manipulate land prices through his cronies, getting in return bribery in cash and other
forms of over 32 million yuan. In 2005, he even openly assured property developers
77
Gong Ting, “Corruption and Local Governance: The Double Identity of Chinese Local Governments in
Market Reform,” The Pacific Review, Vol. 19, No. 1 (2006), pp. 90. As Gong suggests, this does not
mean that corruption is absent in land conveyances through open channels such as bidding, since
officials in charge may divulge crucial information or create preferential conditions to aid favoured
parties in winning land deals. See also Lichtenberg and Ding, “Assessing Farmland Protection,” pp.
65-66; Cui Jie, Xiao Shuijin and Liuyan, “Quanqian jiaoyi, gaofangjia beihou de ‘heishou’” (“The power-
money exchange: the ‘manipulator’ behind high housing prices”), Jiancha ribao (Procuratorial Daily), 17
April 2007, p. 006.
Yew Chiew Ping
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Chapter Three
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that the government had reduced the supply of land for commercial use to arrest the
fall in property prices and drive up land prices in Shanghai.

78
Thus one explanation for the prevalence of land conveyance via arbitration vis-à-vis
other channels is the opportunities for local authorities to use rent creation to seek
bribes or other personal gains from land buyers.
79
This also illuminates why local
officials take an active role in land apportionment and development. In the “bottom-
up” process, officials first identify land tracts with potential market value and then
seek investors through agents or middlemen, who will negotiate with interested
parties on behalf of the authorities, collecting bribes in the process.
80

Government monopoly provides a conducive institutional context for rent-creation.
81
In China’s primary land market, the government holds a monopoly over land supply
as the rural collectives that own land use rights to agricultural land are barred from
entry. Land use rights of collectively-owned land must be transferred to the state
through land expropriation before conveyance to the land user can take place.
82
Not
only is the government the sole supplier of land, it also dictates who may buy land.
Restrictive participation in the land market enlarges the room for corruption as only
“insiders” may gain access to the primary land market.
83
As Ting Gong suggests,
78
Yang Jinzhi and Liu Dan, “ ‘Fanfu xingui’ zhiwang, douzhu hu ‘tudi jutan’,” (“ The net of ‘new anti-
corruption regulations’ caught Shanghai’s ‘major land corruption’”), Xinhua meiri dianxun (Xinhua Daily
Dispatch), 22 February 2008, pp. 4; “Shi ge tanguan ba ge ‘zaijin tudi’” (“Eight out of ten corrupt officials
entrapped by land”), Chongqing shibao (Chongqing Times), 13 April 2007. For other prominent land

corruption cases, see Gong Ting, “Corruption,” pp. 90-91; Li Le and Wang Qiming, “Siyue fengbao ‘tudi
duoguan” zhendong Jing Hu” (“April Tempest: ‘Land claims officials,’ Beijing and Shanghai shaken”),
Zhongguo jingyingbao (China Business News), 16 April 2007, pp. A01; Li Dai, “Fuzhou tudi lianzheng
fengbao” (“Anti-land corruption tempest in Fuzhou”), 21 shiji jingji baodao (21st Century Economic
Report), 28 July 2006, p. 001.
79
Buchanan defines rent as “that part of payment to an owner of resources over and above that which
those resources could command in any alternative use. Rent is receipt in excess of opportunity cost . . .
it is an allocatively unnecessary payment not required to attract the resources to the particular
employment.” See Buchanan, “Rent Seeking,” pp. 46.
80
Wong and Zhao, “The Influence of Bureaucratic Behavior,” pp. 118.
81
Zhang Fei et al, “Difang zhengfu jingzheng,” pp. 89; Li Yin and Zhang Chengyong, “Tudi ziyuan peizhi
zhong de ‘xunzu’ xianxiang jiexi” (“An analysis of ‘rent seeking’ in the allocation of land resources”),
Nanfang jingji (Southern Economy), No. 2 (1997), pp. 13.
82
Li Yin and Zhang Chengyong, “Tudi ziyuan peizhi,” pp. 13; Cartier, “‘Zone Fever’,” pp. 458.
83
Interested buyers not granted entry into the land market will resort to bribing government authorities.
See Keng, “China’s Land Disposition System,” pp. 337-38.
Yew Chiew Ping
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The authority over land (including planning, developing and leasing etc.) has
provided government officials with means of money making. Possessing the
power to decide whether, how, to whom, and at what price to lease the land,
they could easily abuse power by requesting bribes from interested
individuals or institutions.

84
In the absence of comprehensive statistics on land-related corruption in China,
economic theories on rent-seeking are useful in explaining why corruption is rampant
in China’s monopolistic primary land market. First of all, rents prevail and do not
dissipate over time in a monopoly with barriers to entry.
85
As the sole legal purveyor
of land, local authorities decide how much of land to supply. When the quantity of
land supplied is not congruent with (either higher or lower than) that which the market
would have generated, rent-seeking takes place to bring about mutually
advantageous deals for the buyer and seller.
86
For instance, suppose land is under-
supplied in the market resulting in shortage. Land buyers who demand a larger
quantity may then cajole local authorities into selling land outside of the market.
Alternatively, property developers who desire land at prices lower than the market
rate may resort to bribery. Under these circumstances, both parties seek to profit
from violating the law. In the words of Olson points, “. . .any legislation or regulation
that is ‘market contrary’ must leave all or almost all parties with the incentive to evade
the law and is likely to promote criminality and corruption in government.”
87
84
Gong Ting, “Forms and Characteristics of China's Corruption in the 1990s: Change with Continuity,”
Communist and Post-Communist Studies, Vol. 30, No. 3 (1997), pp. 280.
85
In the primary land market, barriers exist on two levels for potential land suppliers, i.e. collective
landowners, and for land buyers. Black or “invisible” markets (yinxing shichang) have resulted due to the
first restriction. Refer to Luo Yingxin, “Woguo tudi yinxing shichang de xianzhuang, weihai ji qi duice”
(“China’s invisible land markets: current situation, perils and countermeasures”), Jiaying daxue xuebao
(Journal of Jiaying University), No. 4 (1995), pp. 67-69; Zhou Ling and Yang Gangqiao, “Tudi yinxing

shichang de jingjixue fenxi” (“An economic analysis of the invisible land market”), Guotu ziyuan keji
guanli (Scientific Management of Land and Resources), No. 1 (2004), pp. 9-12.
86
Olson uses an example to illustrate why rent seeking takes place when the government interferes in
the market to set prices: “Suppose that the government fixes prices and that is lower than the market-
clearing price, the quantity demanded will be higher than the quantity that the suppliers, at that lower-
than-market-clearing price, want to supply. So it will then be the case that there can be a mutually
advantageous trade, one with two parties, a buyer and a seller, gaining – at a price that is higher than
the controlled price and lower than the market-clearing price. Here is a situation in which both parties
gains by violating the law – essentially all of the parts of the private sector act to undermine the law.”
See Mancur Olson, “Why Poor Economic Policies Must Promote Corruption: Lessons from the East for
All Countries,” in Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (eds.), Institutions and
Economic Organization in the Advanced Economies: The Governance Perspective (London: Macmillan
Press Limited, 1998), pp. 22.
87
Ibid., pp. 23.
Yew Chiew Ping
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Yet it may be argued that market forces shall reduce the occurrence of rent seeking
even under monopolistic conditions, if land were transacted through auction, tender
or bidding.
88
In contrast to these channels, land conveyance by negotiation is a form
of political allocation that transpires outside of the market. As attested to by statistical
evidence cited earlier, arbitration dominates China’s land markets. This is because it
creates a win-win situation for both buyers and sellers – it allows buyers to secure
land at below market-clearing prices and the price-fixing officials to reap personal
gains.

89
In other words, rent-seeking emerges as institutions deviate from ordered
markets toward direct political allocation.
90
Having established how a monopoly and closed-door negotiations breed corruption,
attention may now be turned to why and how corruption spreads under such
conditions.
91
Corruption proliferates because of competition among buyers. Shleifer
and Vishny explain: “If buyer A can buy the government service more cheaply than
buyer B can, then he can outcompete buyer B in the product market. So if buyer A
bribes an official to reduce his costs, his competitors must do so also.”
92
Research
based on data from 35 cities in China also confirms that property developers are
twice as motivated to secure lower land prices than higher property prices.
93
88
This is not to say that land conveyance through auction etc. is free from corruption. For instance, the
outcome of bidding may be predetermined. See Zhang Shuisheng, “Jingfang tudi churang jia guapai”
(“Beware of bidding shams in land conveyance”), Zhongguo tudi (China Land), No. 9 (2004), pp. 32-33;
Huang Shisong, “Tudi ‘zhao, pai, gua’ zhong de wenti yu duice” (“Problems and solutions in the tender,
auction and bidding of land”), Zhongguo fangdichan (China Real Estate), No. 2 (2005), pp. 26-28.
89
The biggest losers are the original landowners and the state. Qian Zhonghao and Qu Futian,
“Zhongguo tudi zhengyong zhidu: fansi yu gaige” (“China’s land expropriation system: reflections and
reform”), Zhongguo tudi kexue (China Land Science), Vol. 18, No. 5 (2004), pp. 5-11.
90
Buchanan, “Rent Seeking,” pp. 47.
91

Li Ying and Zhang Chengyong, "Tudi ziyuan peizhi,” pp. 13-14. The authors examine corruption in
land allocation (primary and secondary land markets) by various government departments, such as the
under-reporting of land conveyance fee, illegal approval of land or multiple approvals by departments
across the same level, collusion between government-related land developers and local authorities and
the collection of ad-hoc fees etc.
92
Shleifer and Vishny, “Corruption,” pp. 604; Mu Xiaoman, “Tudi shichang zhong zhengfu yu kaifashang
de boyi fenxi” (“A analysis of the game between the government and property developers in the land
market”), Shangye shidai xueshu pinglun (Financial Times Academic Review), No. 15 (2006), pp. 7-8.
93
Ping Xinqiao and Chen Minyan, “Rongzi, dijia yu loupan jiade qushi” (“Trends in capital financing, land
prices and properties”), Shijie jingji (World Economy), No. 7 (2004), pp. 10.
Yew Chiew Ping
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Chapter Three
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Another reason for the pertinacity of corruption is because collusion among the
participating parties gives each the incentive to cover up legal violations, particularly
in the case of corruption with theft. Land conveyance by negotiation may manifest as
corruption with theft and without, both of which are promoted by the opaque process
of political allocation. In corruption without theft, the official charges the official price
p of land plus a bribe. Price p is turned over to the government.
94
In the case with
theft, the official charges a price q of land plus a bribe, which may add up to below
the official price p of land. He turns over price q to the government while keeping the
bribe.
95
The latter is more persistent and prevalent than the former. In the words of
Shleifer and Vishny,

Corruption with theft spreads because the observance of law does not survive
in a competitive environment. In addition, the buyer in this case has no
incentive to inform on the official, and hence the likelihood that corruption is
detected is much smaller. This creates a further incentive for corruption with
theft to rise. Because corruption with theft aligns the interests of the buyers
and sellers, it will be more persistent than corruption without theft, which pits
buyers against sellers.
96
To sum up thus far, institutional flaws in the primary land market allow profiteering
officials and land buyers to maximize personal gains through land transactions,
thereby reinforcing immoderate land use conversion and requisition. On top of the
flawed processes in the primary land market, China’s less regulated secondary land
market, in which land use rights obtained in the primary market are circulated, has
also contributed to undue land use conversion and requisition by providing a platform
for land speculation.
97
94
Shleifer and Vishny suggest that in the case without theft, “It pays the official to create a shortage at
the official price, and then to collect bribes as a way to clear the market for the government-supplied
good.” See “Corruption,” pp. 602.
95
The example is modified from Shleifer and Vishny, “Corruption,” pp. 601-602.
96
Ibid., pp. 604. Olson explains: “Thus one reason why many societies have a lot of corruption in
government is that they prescribe outcomes that all or almost all private parties have an incentive to
avoid, and almost no one has an incentive to report violations to the authorities.” See Olson, “Why Poor
Economic Policies,” pp. 23.
97
Zhou Weimin and Chen Yan, “Qianlun huabo tudi shiyongquan de zhuanrang xingwei” (“On the
transfer of land use rights obtained through state allocation”), Xizang minzu xueyuan xuebao (Journal of

Tibet Ethnic School), No. 2 (2000), pp. 63.
Yew Chiew Ping
66